Governance & Regime Change

Social Media Fireworks

The king must die so that the country can live. Maximillien Robespierre

I obey the laws of physics. All other laws are negotiable. Elon Musk

The Plot

Being November 5th, it is worth considering governance. On this day in 1605, the recently unified government of England and Scotland thwarted a Catholic plan to blow up the Houses of Parliament and, with it, King James VI of Scotland, recently crowned James I of England.

Alternate History

As it happened, the century of revolution with roundhead versus cavalier, Protestant against Papist, The English Civil War, regicide, The Restoration and The Glorious Revolution evolved an amended but unwritten constitution. A framework that shapes our governance today. However, had the plotters succeeded, Phillip II of Spain would have ascended to the British throne, and the violent struggle over who governed Britain during the 17th century would have taken a different path.  But in the shadow of its historical, unwritten constitution, the UK has just anointed its third Prime Minister in as many months. Our heightened political instability has caused much angst, embarrassment and ridicule. But politics is struggling to keep up with a rapidly changing world everywhere.

It's Everywhere

Israel has just had its fifth general election in four years. The Chinese Communist Party has established President Xi as its most powerful leader since Mao. Brazil’s electorate narrowly selected a former President who served gaol time only three years ago. At the same time, the incumbent hasn’t conceded defeat for the first time since the end of military rule in 1985. Meanwhile, the US mid-term elections will likely see defeat for the Democrats, tempting a return of The Donald to fight Sleepy Joe in a 2024 presidential rematch.

Truth to Power

Governance is about how rules, norms and actions are structured, sustained, and regulated, and those with power are held to account. At a formal level, governance involves upholding the rule of law and the primacy of contract. But critically, governance is also defined by its method of regime change. It is this aspect that often distinguishes the Anglo-Saxon model from alternatives.

Our Truth

In 1972, when President Pompidou asked Chinese premier Zhou Enlai about the historical impact of the French Revolution, he replied that it was “too early to say”. What the translation lost was that he really understood the question to be about the 1968 Paris student riots. But reality has not been allowed to get in the way of the perfect example of long-term Chinese political thinking. What both political leaders shared are national histories of violent political regime change

Pub Quiz Trivia

China and France also both have written constitutions. (Pub quiz alert: the UK, New Zealand and Israel are the only three countries in the world with unwritten constitutions). Margaret Thatcher, a trained and practised barrister, said that written constitutions have one great weakness. That is that they contain the potential to have judges take decisions that democratically elected politicians should make. She further revealed her general disdain for these codified documents by delighting in a Punch cartoon where a 19th-century Englishman asks a librarian for a copy of the French constitution, to be told: ‘I am sorry, Sir, we do not stock periodicals.’

For the Greater Good

The French General Assembly declared September 20th 1792, day one of Year One marking regime change from the absolute French monarchy. One hundred eighty-three years later, on April 17th 1975, the French-educated leaders of Cambodia’s Khmer Rouge declared Year Zero in their even more brutal attempt to erase history and reset a nation. An unremorseful and unconvicted Pol Pot said twenty-five years later when asked what his daughter might think of his legacy; I don’t know. It is up to history to judge. 

Feathers Fly

This week has seen Year Zero declared at Twitter HQ in San Francisco. Those Twitter employees who only show up in the office for the free avocados and yoga are in deep shock. The newly installed Chief Twit has cast out the previous regime and embarked on a modern-day reign of terror. Elon is on a mission, having borrowed heavily to pay yesterday’s price for an asset bleeding $4m daily. He has reluctantly bought this burning platform, which is probably worth less than half what he has paid, costing him $1bn pa in interest. This situation focuses the mind on today’s real problems rather than the future or feel-good issues.

Meanwhile...

Meanwhile, in the same social media solar system, the Jovian planet formerly known as FaceBook (3bn daily active users) has been in a different place to Twitter (200m daily active users). As Chief Twit Musk cuts costs and searches for new revenues, the all-powerful Zuckbot of Meta has been confidently allocating his prodigious advertising cash flows into a bold new future. However, even here, things are not what they seem. The changing gravitational pull of rising interest rates, draining dollar liquidity, and rapidly growing costs also make life more difficult.

Adult Supervision

Under different constitutional arrangments, investors in Meta, sitting on a YTD return of -73%, would be seeking at least a change of course from its leadership, if not a change of regime. But Meta doesn’t operate a pluralist constitution. Furthermore, unlike fellow Web 2.0 giant Alphabet, Meta has discarded all qualified adult supervision. While the Google founders took early council from Eric Shmidt and later the gifted duo Ruth Porat and Sundar Pichai, the Zuckbot has chosen to lean away from Sheryl Sandberg and into a former British Deputy Prime Minister. A man with a record of agreeing to anything to retain power.

Things Change

But it gets worse. The investment landscape is also undergoing a tectonic shift in how the future is valued. The return of positive real interest rates and the global dollar shortage make investors value today’s cash flow more highly. This explains why all social media and internet staple stock prices have crashed to earth. As Ben Thomson of Stratechery points out in his Meta Myths post, Meta’s problems are not that people are deserting its platforms (they aren’t). It is not due to Meta losing audience share to Tik Tok (Tik Tok is growing the market). And Meta’s metaverse CAPEX is not necessarily malinvestment (others will probably do better, but this is currently unknowable).

All at Sea

Meta is in the same storm (albeit in a different boat) as Alphabet, Twitter and the other internet staples. It is a storm of dramatically changing investor time preferences. Financial markets want cash flow, and they want it now. If you need a signal about this sea change, then look at the market reaction to Powell’s unambiguous speech last week. The Fed Chair told investors his work was yet undone and to expect higher rates for longer. As NASDAQ stocks plummeted, in what one wag termed a case of Irritable Powell Syndrome, Exxon Mobil (the former heavyweight champion of global stock markets) hit an all-time high share price. (Exxon is on track to repay $40bn of debt over the last two years).

No Jobs

Into this storm jumps an indebted Elon Musk looking to right-size a burning platform with the constitutional agency to affect real change. Compare this to a failing computer company in 1997 when its returning co-founder reascended its leadership in an equally dramatic regime change. On his return to Apple, Steve Jobs immediately replaced the senior team and fired over 4 000 staff. At the same time, he volunteered it was necessary to inflict pain and lose good people to save the company. Most informed commentators thought Jobs had little chance of saving the company. However, these were actions that Guy Fawkes and Pol Pot would have recognised and approved.

Jeremy

Ealing

05/11/2022

Not investment advice. DYOR. 

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